Budget 2003

Wednesday's Budget was Mr Brown's seventh and in most respects was the least contentious of them all. There were few surprises, the usual disappointments but overall it was a low key affair. In the current cycle of falling output and falling tax receipts there was little the Chancellor could do by way of tax cuts and/or increased public service spending.

It 's main theme appeared to focus on businesses and in particular small businesses and the significance attached to their contribution to the UK economy. Small and medium sized enterprises (SMEs) were mentioned no less than twelve times in his speech and he identified enterprise, innovation and flexibility as the engines of growth, going on to say that the fortunes of the nation hinge on sustained investment . To assist this area of business he announced a series of measures which he claimed would simplify the tax regime, reduce regulation, promote research and development and encourage investment.

On the economy, the Chancellor reduced growth forecast by 0.5% to 2-2.5% for this year, leaving next years unchanged at 3-3.5%. He raised his forecast for borrowing by £3bn to £27bn this year and by £5bn to £24bn for 2004/05. £3bn has been set aside for the Iraq conflict. It is likely that these revisions will be too optimistic, especially for 2003. The assumption , implied by the borrowing figures, is that tax revenues will recover from their current cyclical downturn returning to their previous levels. This however may not be the case. Failing this it is anticipated that borrowing will be greater than indicated. Although this will be a disappointment, overall the ratio of public debt to national income will not rise excessively.

The inflation forecast was kept at 2.5% for the next year. Fourth quarter inflation this year is expected to be 2.75%.

Overall the budget projections for the public finances show that the government is on track to meet its strict fiscal rules over the economic cycle.

From a financial market point of view there is no unexpected bad news.

Income tax and personal savings - it was confirmed that personal tax allowances for 2003 -04 are frozen at 2002-03 levels for the under 65s, but over 65s gain above inflation rises. Basic and higher rate tax thresholds are increased in line with inflation as previously announced. The capital gains tax annual exemption rises to £7,900. The inheritance tax threshold rises to £255,000. Capital gains tax , airport tax and insurance premium tax rates will be frozen.

Income tax rates for 2003-04 are as follows: -

Starting rate band to £1,960
Basic rate band - next £28,540
Non-savings rate 22%
Savings rate 20%
UK dividend rate 10%
Higher rate - income over £30,500
Tax rate excluding UK dividends 40%
UK dividend rate 32.5%

Personal allowances - rates announced for 2003-04 are as follows (ages are as at the end of the tax year).
Allowances that reduce taxable income -
Personal allowance:
under 65 - £4,615
65 to 74* - £6,610
75 and over* - £6,720

Allowances that reduce tax -
Married couple's allowance
Age of elder spouse
under 75* - £556.50
75 and over* -£563.50
minimum - £215.00

* Higher allowances for those aged 65 or more are scaled back when income exceeds £18,300. The married couple's allowance is only available where at least one spouse was born before 6th April 1935.

Two new tax credits - child tax credit and working tax credit - replace the children 's tax credit and working families' tax credit and disabled person's tax credit from April 2003. Rates vary, but people on middle-incomes may qualify, especially where they are paying for childcare.

Pensions - the earnings cap, by reference to which contributions to occupational, stakeholder and personal pension schemes are limited, is increase for 2003-04 from £97,200 to £99,000. The limitation applies to personal pension contributions by both employers and employees.

National Insurance Contributions -

Class 1- not contracted out weekly earnings bands.
Payable on earnings
Up to £89 Nil
89.01-£595 12.8% Employer 11.0%Employee
Over £595 12.8% Employer 1.0%Employee
Men 65 and over and women 60 12.8% Employer Nil Employee
Class 1A
On relevant benefits 12.8% Employer Nil Employee
Class 2
Self employed - £2.00 per week
Limit of net earnings for exception £4,095 per annum
Class 3 Voluntary £6.95 per week
Class 4 Self employed on profits
£4615 - £30940 8%
Over £30940 1%

Other taxes -
Fuel duty increases will be deferred for six months and vehicle excise duty for lorries and motorcycles is frozen. This means the 1.28p a litre annual revalorisation of fuel duties will be delayed until 1st October. Vehicle excise duty for cars and vans will rise in line with inflation, meaning a £5 increase in May.
Beer rises by 1p per pint, and tax on a bottle of wine will rise by 4p. Tax on spirits , cider and sparkling wine is frozen. The price of a packet of cigarettes will increase by 8p.